Owner of Marlboro company accused of Ponzi scheme arrested in Worcester

Friday

May 9, 2014 at 9:30 PMMay 9, 2014 at 10:29 PM

By Aaron Nicodemus and Steven H. Foskett Jr. TELEGRAM & GAZETTE STAFF

WORCESTER — James Merrill, co-owner of TelexFree, a Marlboro company that has been called a billion-dollar Ponzi scheme by the U.S. Securities and Exchange Commission, was arrested Friday in Worcester on new, criminal charges.

Late Friday afternoon, Mr. Merrill made an initial appearance in U.S. District Court on charges of conspiracy to commit wire fraud. After the appearance, Magistrate Judge David H. Hennessey ordered him held at the Wyatt Detention Facility in Central Falls, R.I., pending a bail hearing next week.

Federal prosecutors told Judge Hennessey that Mr. Merrill was a flight risk and should be denied bail.

Mr. Merrill, 52, of Ashland, only spoke to give yes or no answers as Judge Hennessey informed him of his rights during the appearance. He was led into the courtroom in handcuffs.

A spokeswoman for U.S. Attorney Carmen Ortiz confirmed that Mr. Merrill was arrested on Route 9 in Worcester. An arrest warrant has been issued for Northboro resident Carlos N. Wanzeler, 45, TelexFree co-owner and treasurer. Mr. Wanzeler, who holds a U.S. and Brazilian passport, is believed to have fled to Brazil.

TelexFree is accused of being a billion-dollar, international Ponzi scheme, in which early investors were paid with fees paid by newer investors. The company was supposed to be selling voice-over-Internet services, but only earned about $1.3 million on its product, according to the federal civil complaint filed against the company.

The company owes $1 billion to its "promoters," usually customers who were paid to place online TelexFree ads and to recruit new customers and new promoters.

TelexFree's owners also filed for bankruptcy in Nevada, and that case was recently reassigned to U.S. District Court in Worcester.

In the new, criminal complaint, the government bluntly called TelexFree's VOIP services a "front" and that the ad-posting requirements were a meaningless exercise, in which promoters cut and pasted ads into various classified ad sites provided by TelexFree and already saturated with ads posted by other promoters.

The criminal complaint alleged that the overwhelming majority of the company's revenue came from new people buying into the scheme.

"In fact, TelexFree was only able to pay the returns it had promised to its existing promoters by bringing in money from newly-recruited promoters," the criminal complaint alleges.

The scheme collapsed April 14 when the company and its related entities filed for Chapter 11 bankruptcy protection, according to the complaint.

"TelexFree also admitted that it was entering bankruptcy because, after changing the compensation plan, 'These discretionary payments (that is, payouts to current investors) quickly became a substantial drain on the company's liquidity,'" the complaint states. "In other words, once new investor dollars stopped coming in, TelexFree was unable to pay its current investors."

The complaint details what unfolded the day after the bankruptcy filing in April, when federal agents were searching TelexFree's Marlboro headquarters. The company's acting chief financial officer was trying to leave the premises with a laptop and a bag.

He told authorities he was a consultant and was retrieving personal items, but authorities searched the bag and found in it 10 cashier's checks totaling almost $38 million. Eight of the checks were dated from a few days before the bankruptcy filing, and were remitted to Mr. Merrill — that is, Mr. Merrill was identified on the checks themselves as the remitter and purchaser of each check, according to the complaint.

Law enforcement officials seized the checks, and later determined that Mr. Merrill went to Rhode Island with Mr. Wanzeler's wife around the day most of the checks were written to pick them up from a Wells Fargo branch.

The complaint states that Mr. Wanzeler and Mr. Merrill paid themselves millions of dollars from investor funds accumulated in TelexFree accounts.

"By the end of 2013, Merrill had transferred over $3,000,000 from TelexFree accounts to his personal accounts," the complaint states.

The complaint, signed by Homeland Security Investigations Special Agent John S. Soares, states that there is probable cause to believe that between January 2012 and March 2014, Mr. Wanzeler and Mr. Merrill knowingly conspired with each other and others "known and unknown" to commit wire fraud.